Gold Market Update

We have been bullish on the broad stockmarket on the site, but short to medium-term
bearish on gold and silver in the recent past and by extension gold and silver
stocks, due principally to the distribution patterns that have formed in the
metals and their increasingly bearish COT structure, especially gold. However,
there is an inconsistency here that is becoming increasingly obvious and has
led to a re-evaluation over the past couple of days. The inconsistency arises
because a breakout to new highs and strong advance in the broad stockmarket,
which looks very probable for reasons we will look at shortly, will almost
certainly be accompanied by further heavy losses in the dollar. What this implies
is that although already oversold, the current orderly decline in the dollar
will likely turn into a rout and it could plunge into a selling climax. This
must mean that although the gold COT structure is now bearish, it is going
to get even more so in the event that the dollar plunges and gold spikes. There
was a hefty reaction in gold last Tuesday, which we sidestepped, although it
made up most of the lost ground late in the week.

We will start by reviewing the outlook for the broad stockmarket with reference
to a long-term chart for the S&P500 index. Here we see that the index is
at an important psychological juncture, for it is on the point of breaking
out to clear new highs, and on the basis of this chart it is expected to do
so. A big reason is that volume indicators are exceptionally bullish - the
Accumulation-Distribution and On-balance Volume indicators shown at the top
and bottom of the chart continue to make new highs, and by a wide margin. Two
important points need to be made here; one is that we do not, of course, overlook
the fact that in real terms, this index is nowhere near making new highs, as
can be readily seen by plotting it in Euros or Swiss Francs. The other is that
a breakout to new highs is actually nothing more than a compensatory move for
the collapse in the currency, made possible by continued ramping of the money
supply. However, this won't take the shine off the huge profits that are to
be made in Call options, hence the broad
market article of a couple of weeks ago on www.clivemaund.com in which
we focused on Call options in a selection of big mainly DJIA stocks, which
are so far doing well.

Of course, if the broad market breaks out to new highs, then it implies that
despite already being oversold, the orderly decline in the dollar thus far
is going to accelerate - one very possible scenario being that it nosedives
into a selling climax that is followed by a dramatic snapback rally. On the
long-term chart for the dollar index going back to the mid 1980's we can readily
see why this could occur. Over the past few months the dollar has been eroding
a band of crucial long-term support in the 78 - 81 zone and is now right on
the point of breaking below it. In attempting to decide whether the dollar
decline will now accelerate there is an important fundamental factor to consider
- and this is the fallout from the August credit crunch debacle. Overseas banks
and financial institutions are still smarting from having been defrauded to
the tune of trillions of dollars by US banks and financial institutions over
sub-prime mortgage paper. US banks and financial institutions colluded with
rating agencies to repackage and misrepresent these dodgy loans as being much
more sound than they actually were, and then succeeded in farming them off
to unsuspecting foreigners in what amounts to the greatest swindle of all time.
While diplomatic niceties and their own corrupt and compromised natures prevent
the heads of these foreign banks and institutions from standing up and telling
the unvarnished truth about how they were played for suckers, privately they
are seething and out for revenge - and one way they can get it is to dump the
dollar. Like US generals, they will probably find the courage to speak their
minds - once they have retired.

The stockmarket breaking out to new highs implies a falling dollar, as already
mentioned, and with the dollar now breaking down below major long-term support
it is clearly vulnerable to going into freefall, particularly given the fundamental
considerations set out above. In this situation it is hard to see gold and
silver doing anything but going up, despite the current bearish COT structure
in gold. If this scenario comes to pass what we can therefore expect to see
are upside breakouts by both gold and silver - gold above its Distribution
Dome and silver above resistance approaching and at its highs of last year.
Both would be expected to spike, with Large Spec long positions and Commercial
short positions ballooning to levels way above anything seen over the past
year, before the inevitable dramatic reversal occurs. Oil, which is currently
constrained beneath the confines of a dome similar to that in gold, would also
be expected to break out upside, also to compensate for dollar losses.

In conclusion, there are 3 breakout moves to watch out for that will signal
the start of new uplegs in the broad stockmarket and in gold, silver and oil
and resource stocks generally. One is a clear breakout by the S&P500 index
to new highs, which we are very close to, the second is breakouts by gold and
oil above their Distribution Domes. All of these likely are likely to occur
synchronously, and although the situation is silver is not so clear, the breakout
by gold can used as a signal for silver. In the event that this happens, the
gold stocks indices, which have stalled near their highs in a narrow range,
will break strongly to the upside from what will later be seen to be Flag consolidation
patterns.

The above represents the opinion and analysis of Mr. Maund,
based on data available to him, at the time of writing. Mr. Maunds opinions
are his own, and are not a recommendation or an offer to buy or sell securities.
No responsibility can be accepted for losses that may result as a consequence
of trading on the basis of this analysis.

Mr. Maund is an independent analyst who receives no compensation
of any kind from any groups, individuals or corporations mentioned in his reports.
As trading and investing in any financial markets may involve serious risk
of loss, Mr. Maund recommends that you consult with a qualified investment
advisor, one licensed by appropriate regulatory agencies in your legal jurisdiction
and do your own due diligence and research when making any kind of a transaction
with financial ramifications.